Chapter 10: Summary
Aaron Swartz
were worker-owned cooperatives. Workers bought shares in the company
to join and sold them when they left. The cooperatives were quite
successful, more productive than conventional firms, paid much better,
and lowered everyone's wages rather than lay people off. Why didn't
they take over?
Capitalism was successful because it created severe inequalities which
(a) encouraged people to innovate, (b) permitted increasing returns to
scale, (c) let them incentivize labor to work for them on risky
endeavors, (d) channeled elite competition into socially productive
avenues, (e) promoted powerful nation-states to secure property
rights. Complete contracts, as you might have guessed from previous
chapters, were not part of its solution. And without complete
contracts, there's no reason to believe the market will be perfectly
efficient. Yet economists insist on assuming that it is. So we must
look deeper.
The fundamental question is this: why do capitalists get the right to
order laborers around (control rights) as well as the right to any
excess profit produced (residual claimancy). Various theories have
been proposed:
(1) Workers are more risk-averse than capitalists, so they let
capitalists run the show in exchange for a steady wage (essentially
selling their freedom for unemployment insurance).
(2) Most work is done in teams which means that workers can
free-ride. Someone can watch them to make sure they don't shirk, but
who watches the watchman? The solution is to let the watchman run the
show. (One problem with this theory is that owners rarely monitor
actual workers; they hire people to do that for them. Another is that
experiments and the plywood cooperatives show that teams are pretty
good at monitoring themselves.)
(3) Unless capitalists own the company, workers will steal the
benefits of any new technology they invest in. (One problem with this
theory is that it doesn't make any sense.)
(4) Capitalists own firms because they have capital. (As we saw in
the last chapter, capital is more expensive if you're poor.) We see
this in coops -- banks are afraid to loan coops money because there's
nobody in charge that they can do a deal with.
But even if all of these are true, it doesn't explain _power_: why do
workers follow their boss's orders? After all, nobody takes orders
from their grocer. Surely part of it is that it's a pain to switch
jobs -- especially if you have friends at work or would have to move
to get a new one. But presumably part of it is also that there's a
chance you might not find a job at all (whereas it's pretty easy to
find another grocer). Power in employment has its upsides -- it allows
employers to enforce rules against shirking, resulting in more money
for everyone -- but it has its downsides as well: an employer can
sexually harass an employee and the employee just has to take it.
Power in these cases (and the others we've analyzed, like credit
constraints and contingent renewal) comes from shortages. There's a
shortage of jobs, but not of employees. There's a shortage of
customers, but not of products. There's a shortage of lenders, but not
of borrowers. The people on the short side of the deal have _short
side power_. One reason, perhaps, that cars were better in the US than
the USSR was that in the USSR people lined up to buy Volgas while in
the US salesmen lined up to sell Fords.
But how do people end up on the short side? It depends on how wealthy
you are. If you're very poor, the amount you'll need to pay in
interest on the money you borrow to start a business will outweigh any
possible profit you could make. For others, it's not quite so
clearcut, but getting a job still makes economic sense. But once your
each a certain point, it makes sense for you to start hiring labor
yourself and eventually stop working at all and eventually becoming a
pure lender. (Of course, it's not purely wealth -- other personal
characteristics play some role, although wealth affects them too.)
And thus we have class! Economists often try to pretend that class is
nothing more than wealth level, but here we see it's more than that:
it's their relationship to other people. As a result, we have a chart
of cascading power relationships: lenders control borrowers who become
owners who control managers who become employers who control
employees.
These basic empirical facts (obvious even to the Supreme Court) have
been omitted from the economic models. "We might equally well have
begun by regarding the laborers themselves as entrepreneurs," declared
Wicksell. "Remember that in a perfectly competitive market, it really
does not matter who hires whom; so have labor hire capital," echoed
Samuelson. "Calling the employer the boss is a custom derived from the
fact that the 'boss' specifies the particular task. One could have
called the employee the boss because he orders the employer to pay him
a specific sum if he wants services performed. But words are words,"
lamented an important microeconomics textbook. Clearly, the truth is
rather less panglossian.
Next week: Part III - Change.
Aaron Swartz
> the USSR was that in the USSR people lined up to buy Volgas while in
> the US salesmen lined up to sell Fords.
Oh yeah: Chris points out that the interesting thing about this
example is that the people in line in the USSR had plenty of money and
yet they still got the worse end of the deal.